Although the worst of the economic storm has finally passed, gloomy conditions are expected to linger throughout 2011. But the dim forecast hasn’t stopped opportunistic small business owners from cashing in on favorable lending conditions and using the funds to acquire struggling competitors, purchase discounted real estate or expand their global reach. In fact, conservative lenders with healthy loan portfolios have been enticing qualified borrowers with low interest rates and aggressively pursuing deals.
According to the Los Angeles office of the SBA, lenders made 1,725 loans to small businesses in Los Angeles, Ventura and Santa Barbara counties during the nine-month period that ended June 30, 2010, which was about 50 percent more than in the same period a year earlier. The dollar volume of those loans nearly doubled compared with the year-earlier period to $850.8 million.
“Lenders have a healthy appetite for quality loans,” says Sung Soo Han, executive vice president and chief loan officer for Wilshire State Bank. “Given the current lending climate, small business owners should be assertive, shop the market and take advantage of these historically low interest rates and government incentives before they expire.”
Smart Business spoke with Han about the 2011 lending climate and how small business owners can seize the opportunity to drive growth.
How will the 2011 lending climate differ from 2010?
We’re expecting the 2010 economic conditions to persist throughout 2011 and that will require lenders to minimize risk by scrutinizing loan applications and assessing a company’s profitability and business strategies. But that means qualified borrowers are hard to find, so they wield a great deal of power in the current environment. If you own a profitable small business, you’ll receive aggressive loan pricing that includes fixed rates of 4 percent to 5 percent guaranteed for five to 10 years. In addition, the Small Business Jobs and Credit Act of 2010, which was signed into law in late September, could be extended into 2011. The bill incentivizes lenders by raising the government guarantee from 75 percent to 90 percent of the loan, and encourages borrowers by raising lending ceilings from $2 million to $5 million and waiving the origination fees.
Which loan programs are best suited for growth?
Small business owners have many programs to choose from, but these loans are popular for expansion or growth.
- SBA loans. Owners who want to purchase an office building or plant or acquire another business usually opt for an SBA loan because they offer prime rates and borrowers can make a down payment of 10 percent to 15 percent and pay off the balance over a 10-year period. Each lender has different underwriting criteria and capacity, so be sure to call a number of institutions.
- C & I loans. Commercial and industrial loans provide lines of credit from $3 million to $10 million and are frequently used by manufacturers and wholesalers to extend their global reach, open new vertical markets or expand product lines. If you have a relationship with a bank, deposits on account and a track record of timely debt repayment, they should offer you very aggressive pricing. If not, use your power to shop the market.
- Construction loans. Construction of warehouses, office buildings and shopping centers is starting to pick up and debt service starts when the project is completed, which will likely be 2012 when the economy is expected to improve. Loan officers are eager to grant construction loans because they’re allowed to consider future economic conditions during the underwriting process.
Are some loans easier to secure in a tight credit market?
The current climate makes it difficult for owners to secure funding if their business is unprofitable or experiencing cash flow problems, but any loan that is low risk, guaranteed by the government or secured by assets will be easier to obtain. For example, trade finance loans, which are used to finance transactions between importers and exporters are almost risk-free, yet demand for this product has waned, so borrowers have the upper hand and can drive a great deal. The SBA’s Export Working Capital Program (EWCP), which provides short-term working capital to exporters, is favored by lenders because the government guarantees 90 percent of balances from $300,000 to $5 million. When owners want to capitalize on an emerging opportunity, they often select an asset-based loan (ABL) which is secured by real property, accounts receivable, equipment or finished inventory. ABLs offer a speedy underwriting process that doesn’t focus on the applicant’s creditworthiness.
What else should owners know about the current lending process?
Lenders have been bombarded by calls from small business owners, but given the lackluster economy, they can only entertain requests from qualified borrowers. Grab their attention by describing your company’s 2010 financial results and providing a copy of your tax return. Next, provide a copy of your business resume and be prepared to conduct a line-item review of your company’s financial statements. Bolster your case by describing any non-recurring expenses that can be added back to boost cash flow or by offering data that illustrates industry cycles or projected growth. As long as you can repay the loan go for it. 2011 offers the perfect lending climate to expand your small business.
Sung Soo Han is the executive vice president and chief loan officer for Wilshire State Bank. Reach him at (213) 427-6595 or firstname.lastname@example.org.